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Goldman and Its Biggest Critic Agree on Iron Ore Outlook

(Bloomberg) -- It took massive output cuts from the world’s largest iron ore producer to get Goldman Sachs Group Inc. analysts and their biggest critic to agree on their outlook for the steelmaking ingredient.

“Let me refresh your minds,” Goncalves said in a presentation at the bank’s metals conference in November. “Last year, Goldman Sachs’s Jeff Currie said that I don’t know where prices go -- $65, three months later will be $60, then it will be $55 then $50. It went $65, $70, $75 then $70 then $75 so you are wrong, I was right.”

This time around, Goldman analysts led by Currie are predicting a near-term supply shortfall after a fatal dam disaster prompted steep production cuts by Vale SA. The New York-based bank said other iron ore producers outside of Brazil won’t be able to boost their output fast enough, sending iron ore prices higher. Goncalves agreed.

Iron ore futures have surged to the highest since 2014 on concern that the increasingly severe crisis at Vale will curtail global supplies, tightening supply. Prices have climbed more than $15 dollars a ton since Jan. 24, a day before the dam collapse that triggered Vale’s production cuts.

“The full impact to the iron ore market of the catastrophic events with Vale has not been properly quantified yet,” Goncalves said in an earnings call Friday. “Another thing that you’re going to see in the world -- as a consequence of Vale’s problems in Brazil -- we’re going to see not only a shortage of iron ore but a shortage of pellets.”

Vale’s troubles began in late January when a tailings dam collapsed, killing at least 150 people and leveling part of a town. The company announced it’s decommissioning dams similar to the one involved in the fatal accident -- a move that would cut annual output by 40 million tons. The company has said it plans to offset some of the output loss by ramping up operations elsewhere.

Its fate took a turn for the worse after a court order forced Vale to halt operations at its Brucutu mine, crimping production by another 30 million tons and prompting the company to declare force majeure on some of its contracts. On Friday, Brazil’s National Mining Agency ordered the evacuation of about 500 people near the company’s idled Gongo Soco mine after its consulting firm declined to vouch for the integrity of a tailings dam.

Goldman isn’t the only bank predicting a shortfall. In January, even before Vale said it’s halting operations in Brucutu, Australia & New Zealand Banking Group Ltd. analysts were already forecasting a shortfall of 10 million tons this year, revising their earlier outlook for a 15 million ton surplus.

“In the near term, the significant disruption to Brazilian supply and the uncertainties associated with it will likely keep iron ore prices elevated and volatile as supply elsewhere cannot adjust quickly enough to offset the shortages,” Goldman analysts including Currie and Hui Shan said in a note dated Feb. 7.